Tandem Diabetes Care Inc (TNDM) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandem Diabetes Care first-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Susan Morrison, Chief Administrative Officer. Ma'am, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining Tandem's first-quarter earnings conference call.

Today's discussion may include forward-looking statements. These statements reflect management's expectations about future events, product development timelines, and financial performance and operating plans, and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the risk factors portion or elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q, and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements whether as a result of new information, future events, or other factors.

Kim Blickenstaff, Tandem's President and CEO, will be leading today's call. And at this time, I will turn it over to Kim.

Thanks, Susan, and good afternoon, everyone. Joining me today is John Cajigas, our Chief Financial Officer, who will be talking about our financial results for the quarter.

Overall, I'm pleased with the Company's progress in the first quarter. We remain on track to achieve our financial guidance for the year.

Pump shipments grew 102% compared to the first quarter of 2013. This is of particularly significance since we faced a number of challenges during the quarter; namely, it being a period of significant disruption due to our sales force expansion from 36 to 60 territories, which is now complete. First-quarter seasonality was also a factor, which results in it typically being the lightest in sales due to the year-end timing of when spending accounts and deductibles are reset. And finally, our voluntary recall that took place in January.

So total revenues for the first quarter of 2014 grew 48% to $8.1 million, compared to $5.5 million for the same period of 2013. The growth rate for pump shipments exceeded the growth rate for sales, primarily due to $1.9 million of t:slim pump sales recognized in the first quarter of 2013 that were shipped in the fourth quarter of 2012. John will discuss this in more detail during his comments about our financial results.

A large portion of our year-over-year growth is attributed to our sales force expansion. As a reminder, we began 2013 with only 11 territories and expanded to 36 territories during the year. This timing was to allow for our field organization to complete new hire activities in time to be productive by the fourth quarter, which is typically the strongest due to the seasonality of our industry.

Using the same philosophy as last year, we expanded from 36 to 60 territories in the first quarter of 2014, maintaining a one-to-one ratio of sales rep to clinical educator in each territory that we added. The vast majority of our new sales reps and our sales management have diabetes experience, many in selling insulin pumps. And as a reminder, we forecast that it will take about nine to 12 months for a rep to become fully productive from their date of hire.

I am particularly pleased that we continue to see a growing portion of our business come from people who are new to pump therapy, and we are equally encouraged by our customers' response to t:slim's easy-to-use features and modern design. At the time of purchase, we ask customers if they were previously managing their insulin therapy with multiple daily injections or a pump, and if a pump, what type were they using.

Through March 31, 2014, approximately 48% of respondents since launch of t:slim reported that they converted from multiple daily injections, or MDI, to the t:slim pump. This is up from approximately 34% through the end of the first quarter of 2014 -- or 2013.

As we have shared in the past, it is a strategic goal of our Company to expand the insulin pump market, as only 27% of people with type I diabetes use an insulin pump. So we're very happy to see this trend continue.

As discussed on our last call, the Company initiated a voluntary cartridge recall in January. While it's our goal for this type of issue to never happen, it was a real-life opportunity to demonstrate our corporate values and the importance we place on delivering a product that will help people improve their diabetes management. To do so, customer safety must always be the organization's top priority, and I'm proud of how quickly and thoroughly our employees were able to respond after the concern was initially identified during our own internal testing.

The direct financial impact to the first quarter of this year was $300,000, as anticipated. More difficult to quantify is the time that we devoted internally to addressing the issue, answering questions, and replacing affected cartridges, in addition to some disruption in the field for those first few weeks in January after the announcement of the recall.

Regardless, we believe the impact of the recall is now largely behind us and our newly expanded field team is focused entirely on driving increased awareness of t:slim and its easy-to-use features and supporting our rapidly growing base of existing customers.

Also, in April we announced that we amended our term loan facility with Capital Royalty Partners. I'm very pleased that we were able to successfully renegotiate this agreement, as it will allow us to direct more funds towards scaling the business and improving operational efficiency.

So at this point, I will turn it over to John to discuss our first-quarter financial results.

Thanks, Kim. I will focus most of my comments today on sales and gross margins for the quarter.

Looking at our sales and product shipments first, sales for the first quarter of 2014 grew 48% to $8.1 million from $5.5 million for the same period of 2013. As a reminder, the first quarter of 2013 included approximately $2 million of sales that related to the t:slim pumps that were shipped in Q4 of 2012 but not recognized as sales for GAAP accounting purposes until Q1 of 2013. This deferral related to our 30-day t:slim return policy and the lack of product return history back in 2012.

T:slim pump shipments for the first quarter of 2014 grew more than 100% to 1,723 pumps from 852 pumps for the first quarter of 2013. As of March 31, our cumulative shipments since launch was approximately 9,250. For the first three months ended March 31, 2014, and 2013, sales of our t:slim pumps accounted for 86% and 95% of our sales, respectively, while related pump supplies accounted for the remainder of our sales.

T:slim pump sales grew 34% year over year on a GAAP basis, while pump supplies accessories grew almost 300%.

We believe that the primary driver to the increase in the t:slim pump sales during the first quarter of 2014, compared to the first quarter of 2013, was the expansion of our sales force. We still expect our latest sales force expansion to 60 territories in Q1 will have a meaningful impact in the latter part of 2014. We anticipate that the productivity disruption as the territories are realigned and responsibilities adjusted will begin to taper off here in Q2.

This disruption, along with the typical seasonality experience in the insulin pump industry during the fourth quarter and first quarter of each year, also likely contributed to the lower sales performance in Q1 of this year compared to the fourth quarter of last year.

Like Kim, I'm very pleased to see a high percentage of our customers being new to pump therapy. Based on our customer surveys, we estimate that 52% of pumps shipped during the first quarter of 2014 and 48% of our pumps cumulatively shipped to customers were new to pump therapy.

Sales to distributors accounted for 68% and 73% of our total sales for the first quarters of both years. As we grow, we expect sales to distributors to continue to increase, but over the longer term, we expect it will comprise a smaller percentage of our overall sales.

Moving on to cost of sales and gross margins, we continued to see positive gross margins even as we saw the typical seasonal drop-off of sales during the first quarter. Our overall gross margin for the first quarter of 2014 was 11%, compared to 12% for the fourth quarter of 2013 and 37% for the first quarter of 2013.

The gross margins for each of these periods were impacted, to some extent, by two one-time items. Let me go through those now.

The first was our Q1 gross margin was reduced by four percentage points due to the $300,000 of cartridge recall costs that Kim mentioned. As a reminder, the direct costs associated with the recall reduced our gross margin for the fourth quarter of 2013 by 13 percentage points.

Secondly, our gross margins for the first quarter of 2013 increased by 2 percentage points as a result of the deferred sales and cost of sales I mentioned earlier.

After considering these one-time items, the primary reason for the change in the gross margin between the first quarter of 2014 and the first quarter of 2013, as well as the fourth quarter of 2013, was an increase in the per-unit manufacturing overhead costs of our products. Following the first quarter of 2013, we expanded our manufacturing operations to address increasing production volume requirements.

Our overall total overhead cost for the first quarter of 2014 was more than 50% higher than the first quarter of 2013 as our sales volume more than doubled during that period. The total overhead costs were relatively flat between the fourth quarter of 2013 and first quarter of 2014, but there was a 28% drop-off in pumps shipped.

Our manufacturing overhead costs have been and will continue to be a big component of our cost of sales of our products. As a result, we anticipate variability in our quarterly gross margins as we manage our production capacity and output, improve our processes, implement additional manufacturing equipment, and expand our manufacturing facilities.

Also contributing to the gross margins were the varying levels of reimbursement among the changing mix of third-party payers; the increase in sales of pump-related supplies during the fourth quarter of -- I'm sorry, the first quarter of 2014, compared to the first and fourth quarter of 2013. Our gross margins on the t:slim pumps are higher than the gross margins on the pump-related supplies and are expected to remain that way into the future.

These and other factors, such as the percentage of products sold at distributors and any new products we sell in the future, may continue to impact our gross margins.

Looking at the rest of our P&L, we concluded Q1 with an operating loss of $20.8 million, compared to $7.2 million for the same period in 2013 and $16.5 million in the fourth quarter of 2013. Our operating expenses for Q1 of 2014 were $21.7 million, compared to $9.2 million for the same period of 2013 and $17.7 million for the fourth quarter last year.

The increase in our operating expenses were primarily associated with the growth in our commercial operations, primarily the increase in that sales force. As of March 31, 2014, we had more than doubled our headcount in all of SG&A functions compared to March 2013, which included adding 100 employees since the beginning of the year here. We now have over 400 employees in our organization.

Our operating losses included significant increases in our noncash stock-based compensation expense. During the first quarter of 2014, we recorded stock-based compensation of $3.8 million, compared to $56,000 in the same period of 2013 and $2.8 million in the fourth quarter of 2013.

Moving on to guidance, you will see that in our press release today we are affirming our 2014 financial guidance. We still expect our full-year 2014 sales to be in the range of $48 million to $54 million, with sales being heavily back-end loaded. No sales from potential new products are assumed in this guidance.

We do believe that the expansion to 60 territories will have an increasing positive contribution to our sales growth in the second half of 2014, especially in the fourth quarter, and the increasing volume should have a positive impact in our gross margins for the remainder of the year.

We still expect some continued productivity disruption for another two to three months, but then it should begin to taper off here in the second quarter. Overall, we expect our reps to reach their stated productivity within nine to 12 months of their hire date.

Operating margins, there is no change to our operating guidance for operating margins this year. We expect our operating margins for 2014 to be between a negative 130% and a negative 140%. This includes noncash stock-based compensation expense, which we currently estimate to be $17 million to $18 million.

With respect to cash, at March 31 we had $113 million in cash. We expect our current cash to be sufficient for our operating needs for at least 18 months. Similar to my comments last quarter, we do have scenarios where we can reach cash flow breakeven on the cash we have today. Key assumptions in those scenarios involve rep productivity, our ability to timely secure regulatory approvals and successfully commercialize potential new products, and our ability to gain leverage within our operations as sales expands new products currently in development roll out here.

I'd also like to remind everyone that in early April, we amended our current debt arrangement with Capital Royalty. We improved some key provisions, such as reducing our interest rate and extending our interest-only period to March 2018. Prior to the amendment, we were to begin repayment of the principal of that debt in January 2016. The extension of the interest-only period will allow us to repurpose cash originally intended to service the debt to instead use that for cash for operations during that period of time.

We also increased our access to additional capital under this arrangement to $30 million from $15 million prior to the amendment and adjusted some covenants, including our minimum revenue requirements.

And with that, I'll turn it over to Kim.

Thanks, John.

As John mentioned, we're continuing to make progress in shifting more of our sales to a direct billing channel. Securing payer contracts is a priority for the Company, and we're very pleased to announce that we recently signed a new national contract with Kaiser that will allow us to immediately service all Kaiser patients in northern California on a direct basis. Other regions within the Kaiser network can be added to this agreement, which we are already working to achieve.

We are also in active discussions with several other national payers. Expanding our network of payers will provide our customers with greater direct access to purchasing the t:slim pump and will allow us to better support t:slim customers by improving our order-to-delivery time and streamlining logistics.

Turning to the Company's products in development, we're using the t:slim pump as a platform from which we can expand our business to support different segments of the diabetes community. The Company's top priority is our integrated product with the Dexcom G4 sensor, and we're targeting to submit our PMA application to the FDA in June. The final test will be completed early next month and then it will take a couple of weeks to finalize the submission documents.

Our next product in development is t:flex, our large-volume cartridge which holds 480 units of insulin, compared to t:slim's 300 units of insulin. We still anticipate filing a 510(k) for t:flex in mid-2014, as soon as the resources free up from our integrated product with Dexcom.

We have taken the same consumer-focused approach in the development of our products in development as we did in the design and the development of t:slim. We continue to be encouraged by the number of people who are choosing t:slim to manage their therapy, particularly with the large percentage of our customers who are choosing pump therapy from MDI. We look forward to sharing the benefits of t:slim with more people through our expanded sales and clinical team during 2014.

And with that, I will turn it over to the operator for the Q&A portion of our conference call.

(Operator Instructions). Thom Gunderson, Piper Jaffray.

Kim or John, can you give us a sense, to the extent that you can, of the impact of Q4 to Q1 seasonality where you get the sticker shock from insurance and people maybe buy a little ahead and the disruption in the territories by adding so many in a short period of time? Any sense of whether that is 50-50, 60-40? How much impact did you see from seasonality?

It is hard to quantify which bucket it is coming in. The typical seasonality drop that we were expecting, that we saw in one of our competitors early in their launch, was somewhere between 15% and 25% of a drop-off in sales because of that. So if you assume that our business followed along that path, then the remainder of it is probably associated with the disruption.

Got it. Thanks. Do you have any sense of same-store sales yet? Clinics, maybe, that bought on in the first half of last year and how their sales went in Q1?

Sorry, Thom, we are not providing that kind of detail.

Okay. And then, two more quick ones. One is on competition. Did you see any decline in competition from Animus or any increased difficulty from Medronic in the launch of their new product?

I think with Animus being in their situation today, we are seeing a strong pull towards our product from that part of the world of insulin pump makers out there. And on (multiple speakers) -- on the other side, with Medronic's launch, it's pretty strong. We are still continuing to take share at their percentage of the market.

Got it. Thanks. I will leave it at that, Kim, and go on to the next guy.

Kristen Stewart, Deutsche Bank.

Just wanted to go back over just the timing for new products. Sorry, I think I missed just what is next with Dexcom. I know you said you filed or plan to file in June, but what was the other data point relevant to that filing?

This is John. We are looking to file by the end of June for t:sensor, and then t:flex, as soon as the resources move off that product, they will be focused on getting t:flex to the FDA.

Okay. And would you expect, about a year review time in terms of t:sensor at this stage, given what you know with the FDA discussions so far?

Generally, it is anywhere from 12 to 18 months.

Okay. And then, just in terms of quantifying the recall again, what was the estimate that was $300,000? That is the total cost is your best guess for this quarter?

For this quarter, it is around $300,000. And it is as we expected back in Q4 when I talked about it.

So the lion's share of the cost went through in Q4, but there was some product that was made in Q1 that had to be written off in the period it was made.

The total was about $1.6 million, though; $1.3 million was last year and $300,000 was this quarter.

Correct.

Okay. And that is now largely behind, I assume?

That is.

Okay. Any color in terms of whether or not any of that recall had any impact on sales during the quarter or was it just more the general seasonality and just the sales force expansion?

It certainly sucked up sales time, I would say, in the first three weeks of January, administering, getting kit cartridges out in the field, and answering questions and that sort of thing. So it had to have some -- but we can't quantify what percentage it was of the total drop.

Okay. And you haven't seen any clinics pull out of t:slim just because of the recall issues or anything like that?

No, I think the attitude is that they see recalls from every class of diabetes products and every type of pump. So, it's not unusual to see it.

Okay. Perfect, thank you.

Rick Wise, Stifel.

A couple of questions. On the Kaiser contract, how many covered lives are there initially? And did I understand you right that there are several other phases or other related contracts? Just can you help us understand in a little more depth the impact that could have on the year, as well?

Yes, I can't give you the lives because of some of the confidentiality requirements, but we do have a national contract with Kaiser on a national scale. And Kaiser is organized into different regions throughout the US. And we have initiated the first region, which is in northern California, which is where we were running a trial program with them prior to the contract being signed.

And how do we think about -- as we look ahead to the rest of the year, how should we expect to see that impact affect the business in coming quarters? Is it going to be driving sales? Is it improving margins? Is it both?

The percentage of direct business should increase because of it. And Kaiser has its own organization dealing directly with manufacturers. So, it does help us on a direct basis.

But I can't quantify like how many customers are going to come through that. It's still a selling process that we need to go through. It just gives us a license to access those patients.

But they are the largest provider here in California and being locked out of it, obviously, has impacted sales in the prior year and a half that we have been on the market. So that's a big (multiple speakers) that is a big access for that part of the country.

Right. So clearly opening a door that was previously closed. I just wanted to make sure I (multiple speakers)

Right.

John, on the op -- last question, I know for many reasons your guidance to operating margins for the year, but when we think about OpEx when we're trying to model, you did -- I think I'm saying the number right -- $21.7 million in the first quarter because of the ramp, et cetera, et cetera, and there were some nuances around the recall, as well.

If we think of it in dollars, is this a run rate for those -- a rough quarterly run rate in dollars for the first few quarters until we get to the fourth quarter just as we're thinking about our model?

I think the first quarter is representative of where we are, I think. We did hire some people during the quarter. As I mentioned, we hired close to 100 people during the quarter. So they are not in there for a full quarter. So there's going to be some increase because of that.

And I do expect that we will continue to ramp some of the organization behind the sales force just to deal with the commercialized aspects around the Company.

So again, looking at the second-quarter and the third-quarter estimates, up $1 million or $2 million or more just sequentially? Is that the rough thinking?

It will grow because of that. We do have two buildings that we will be bringing on in the next year here, one facility probably here in the second half of this year, so that's going to increase some costs here as well.

All right (multiple speakers)

Most of it is going to be headcount that you grow behind the sales force expansion. So if our sales grow as they have grown in the past, you would expect the infrastructure behind it is going to grow as well.

Thanks very much.

(Operator Instructions). At this time, I am showing no further questions. I'd like to turn the call back to Kim Blickenstaff for final remarks.

Okay, thank you again for joining us this afternoon. We have two upcoming investor conferences we want to inform you about. We will be presenting at the Deutsche Bank annual healthcare conference on May 8, this week, and at the Bank of America Merrill Lynch healthcare conference on May 14.

As for industry events for the Company, what we will be attending, we will be attending the ADA conference in San Francisco, which is June 13 to June 17, and the Children with Diabetes Friends for Life conference in Orlando, which is July 1 through 6.

So in conclusion, I am pleased with our start for 2014 as it is the point from which we will be working to build momentum throughout the year and we look forward to keeping you updated as the Company continues to progress in future conference calls. Thank you for attending today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.